Receivers to control 3 Madoff-linked hedge funds

NEW YORK (Reuters) -- Receivers would take control of three hedge funds run by prominent money manager Ezra Merkin and linked to the Madoff fraud, lawyers for New York's top legal officer and Merkin said Tuesday.

The lawyers said in court they had reached an agreement in principal for one receiver to handle Ariel Fund Ltd and Gabriel Capital LP and a second receiver to control Ascot Partners LP as part of an effort to recover money for defrauded investors.

"We believe this resolution in principal will be in the public interest and serve the victims of the fraud," David Markowitz, an attorney for New York Attorney General Andrew Cuomo told State Supreme Court Justice Richard Lowe.

The judge gave Cuomo's office and Merkin's lawyers until May 28 to finalize the agreement, which comes after the attorney general sued Merkin for civil fraud in April, accusing him of steering $2.4 billion to confessed swindler Bernard Madoff and lying to investors.

Madoff, 71, a former nonexecutive chairman of Nasdaq, pleaded guilty in March to running a fraud of up to $65 billion, Wall Street's biggest investment scheme. He is jailed awaiting sentencing on June 29 and he is likely to spend the rest of his life in prison.

Merkin's lawyer, Andrew Levander, said in a written statement Tuesday that the fund founder was working closely with Cuomo's office.

"As part of his continuing efforts to maximize the returns to investors in the Funds, Mr. Merkin has agreed in principle to appoint Guidepost Partners LLC, a leader in global investigations, security, and compliance, as the receiver for the Funds while he remains available to consult regarding the wind-down at no cost to the Funds," the statement said.

When Cuomo sued Merkin, Levander said Merkin performed extensive due diligence on Madoff, but he too was misled just like other investors, which number as many as 7,000, according to court documents.

Merkin also has been sued for more than $500 million by a trustee appointed in Manhattan federal bankruptcy court who is winding down the brokerage arm of Bernard L. Madoff Investment Securities LLC. Merkin faces numerous lawsuits by investors.

The proposal to appoint receivers also needs to be reviewed by lawyers for New York University, one of the institutions that sued Merkin.

The cases are People v J. Ezra Merkin and Gabriel Capital Corp 450879/2009 and New York University v Gabriel Capital Corp, J. Ezra Merkin, et al 603803/2008 in New York State Supreme Court.